Canada: The Pros And Cons Of Deferred Grain Income

When the federal budget was announced last March, many missed the announcement of a consultation program exploring whether or not the Canadian government should continue allowing farmers to defer grain income. Part of the government's efforts to promote a fair tax system, this program gave everyone affected by this issue an opportunity to provide input. There are several credible arguments for and against deferred grain income, but these are the most widespread and persuasive positions.

FOR: It helps farmers navigate a volatile industry

Farmers are in an extremely volatile industry, mostly because of factors beyond their control. Examples include the weather, commodity prices and government funding. Since this industry is so volatile, it's difficult for farmers to manage their income without having a deferral program in place. In a year of record production, farmers could be taxed heavily, while in other years – when production and prices aren't as good – their income is much lower. Having the ability to defer income gives producers the ability to smooth out their income, so their tax bill isn't so erratic.

AGAINST: It may not be relevant anymore

As the government sees it, the ability to defer grain income may not be relevant anymore, as the Canadian Wheat Board – the reason the deferred grain option came into being in the first place – was eliminated a few years ago. Since the Wheat Board was the sole purchaser of listed grain, farmers had less control over the sale of their product. Now that the delivery of grain is the sole responsibility of the producer, the government sees less need to provide support in the form of a tax deferral.

FOR: It helps farmers make good decisions and meet the demand for grain

The ability to defer income results in better decision-making, as it allows farmers to sell their grain when the price is right, rather than as a response to their tax obligations. If there was no deferral program in place, farmers would be less inclined to sell their grain toward the end of the year. As a result, there would be little grain in the marketplace in October, November and December. This would dramatically decrease the amount of grain moving, which would slow down railway activity. With the start of the new year, many farmers would be looking at selling their grain, resulting in an over-reliance on roads, the railway system and grain terminals.

AGAINST: It gives farmers less incentive to incorporate

If the ability to defer grain income is eliminated, you might see an increase in the number of farms that would pursue incorporating their operations. As farmers face higher taxes, incorporation might be an appealing option, lessening the impact of their new tax burden. For those who are on the fence, the elimination of deferred grain income is one development that could push them toward incorporating, which would benefit their business in many ways.

FOR: It helps farmers avoid cash flow problems

By allowing farmers to lower their tax bill, deferred grain income makes more cash available to cover the cost of running a farming business. If this option is eliminated, there is going to be a lot more tax owing, which would have a negative effect on cash flow. If more tax dollars are owing, farmers' ability to finance next year's crop will be adversely affected.

AGAINST: Is it unfair to other businesses?

There may be a perception from people in other businesses that the ability to defer is an unfair policy, as this is a special treatment only granted to those working in agriculture. While farmers are facing unique challenges, people in all businesses could benefit from the advantages of deferring some of their income for tax purposes.

The consultation program announced in the federal budget concluded on July 24, 2017, followed by an announcement on Nov. 6, 2017 that the government had carefully considered all the submissions received during the consultation and decided to maintain the current tax treatment of deferred cash purchase tickets. This decision was welcomed by the agriculture industry, but this issue could be revisited in the future. If deferred grain income is ultimately eliminated, this will change the way Canadian farmers do business, but there are options available that can keep the negative impacts of this potential change to a minimum. Given the volatility of the farming industry, only those who take the time to make informed, responsible decisions will continue to thrive.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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